The EU’s Carbon Border Adjustment Mechanism (CBAM) – climate leadership or geostrategic misstep?

Written by Annica Auer and edited by Tommaso Filippini

On 1 October of this year began the transitional phase of the EU’s carbon levy, the Carbon Border  Adjustment Mechanism (CBAM). It forms part of the European Commission’s Fit for 55 package of  climate policies which aims to lower EU emissions by 55% by 2030. The CBAM will complement the  EU’s Emissions Trading Scheme (ETS) which imposes a price on in-scope industries for emitting  greenhouse gases. So far, however, much of the ETS’s effect has been diluted by the allocation of so

called free allowances which means that, even if a company falls within the scope of the ETS, it does  not have to pay. This is so as to prevent ‘carbon leakage’, meaning de-industrialisation caused by an  exodus of European companies to jurisdictions with less stringent climate policies. As free allowances  are gradually being phased out, there was thus a need for a new policy to prevent carbon leakage: the  CBAM is the European Commission’s solution to this problem (European Commission, n.d.). Approved by the European Council and Parliament in May, it works by imposing a carbon tax equivalent to the  ETS carbon price on (specified) imports from non-EU countries with less ambitious climate policies.  The European Commission hopes to thereby mitigate the competitive disadvantage that European  industry faces due to the ETS while simultaneously achieve a ‘Brussels-effect’, spreading green targets  around the globe by leveraging the European market’s attractiveness (ibid.).

The CBAM comes at a time of heightened international trade tensions triggered by Covid-19 and  exacerbated by Russia’s war in Ukraine (Bukowsky, 2022). Since its inception, it has been facing  criticisms of protectionism under the pretence of climate policy (ibid.). Foremost among accusations  are that the CBAM is not compliant with WTO rules regarding non-discrimination (Appunn &  Wettengel, 2023) and that it may have devastating consequences for developing countries which have  less fiscal space to invest in greening their industries but also bear less historical responsibility for  climate change (LSE, 2023). Much ink has been spilled discussing either of these issues; I will therefore  not focus on them here but instead take the European Commission – which has denied allegations of  the CBAM’s non-compatibility with WTO rules (Gentiloni, 2023) – by its word. It has claimed to be  aware of concerns regarding fairness towards developing countries (Bruegel, 2023) but has yet to  outline how it plans to mitigate any adverse effects that the CBAM might have on low income  countries. Meanwhile, it has rejected suggestions for a redistributive mechanism coming from the  European Parliament and has said that including exemptions for certain countries in the CBAM is  technically impossible (ibid.). Whilst arguments about climate justice towards developing countries are  extremely relevant, and have played an important role in motivating antipathy towards the CBAM, they have clearly so far failed to sway the European Commission. This paper will therefore pursue a  different approach and argue that pursuing the CBAM as it is currently and ignoring the concerns of  developing countries, notably in Africa, is likely to have adverse geoeconomic and strategic  consequences. I will go beyond exploring the negative impact of the CBAM on developing nations, as  many have done, and consider LMICs not just as being at the mercy of the EU and other western actors  in their low-carbon transition, but as actors in their own right whose criticism the EU would do well to  take into account. 

EU-Africa relations are increasingly salient. In the face of growing competition on an ideological and  economic level from China and Russia, maintaining strong relations with Africa is important for Europe (Siegle, 2022). Climate change has added a new dimension to the EU-Africa relations: because of its  richness in minerals needed for batteries and other technologies, the continent will be critical in  delivering the raw materials needed for the green transition (Brookings Institution, 2023). Forging  trade links today will therefore be crucial to technological adaptability tomorrow. Here, too, Europe  has competition: Africa’s trade with the rest of the Global South has been increasing, now constituting

almost 60% of its overall trade (UNCTAD, 2023). China issub-Saharan Africa’s largest individual country  trading partner and raw materials and energy represent a crucial component of their trading  relationship: about three fifths of sub-Saharan Africa’s exports to China are metals, mineral products,  and fuel (IMF, 2023). China is also the largest source of imports for African countries as well as the

largest bilateral official lender to countries in sub-Saharan Africa (though both FDI and lending have  been declining in recent years) (ibid.). It is thus safe to say that China has been creating new  dependencies which may harm the EU’s economic and geopolitical interests. However, it is also  important to note that the EU remains the largest provider of Official Development Assistance (ODA)  to Africa through its NDICI-Global Europe instrument and remains the biggest contributor to climate  policies in Least Developed Countries (Bruegel, 2023). The EU has also long been cooperating with  Africa on non-climate areas peace and security, health, and education, to name just a few areas,  through fora such as the Post-Cotonou Agreement and the Team Europe Initiatives (European  Parliament, n.d.).

In this context of increased competition for Africa’s resources but also its political allegiance, the BRICS  movement has been gaining increased attractiveness for many African states. Its enlargement in  January 2024 means that the grouping is increasingly gaining significance when it comes to trade, but  also in the political arena, including when it comes to shaping the green transition (Procopio, 2023).  The BRICS have already overtaken the G7 regarding contribution to global GDP, doubling their share  of global trade in the last thirty years (Fofack, 2023). The joining of forces among countries of the  Global South also has implications on an economic and energy level: south-south trade has been  increasing (IMF, 2023), underpinned by the BRICS’ growing middle class and resulting increase in  purchasing power (Fofack, 2023), and this may well lead to lead them occupying bigger shares of each  other’s energy sectors, including those that are of interest to the EU in its green transition (Procopio, 2023). This growing economic might is paralleled by an increase in geopolitical importance, as pointed  out by Anil Sooklal, South Africa’s ambassador to BRICS in advance of the August summit (Fofack,  2023), for example at the UN.

The BRICS have been extremely vocal in opposing the CBAM, threatening legal action on the basis of  non-compliance with WTO rules (Cash, 2023; Majkut, 2023; Euractiv, 2023; Pauw et al., 2022). They  argue that it goes against their right to development because fossil fuels are crucial for growth,  development and energy security as developing countries transition to a more sustainable future  (BRICS, 2023) and oppose what they see as trade barriers imposed ‘under the pretext of tackling  climate change’ ‘shift[ing the] burden of addressing climate change… to BRICS members and  developing countries’ (ibid., p.19). Many African countries have joined them in their critiques (Van  Schaik & Cretti, 2023). Indeed, the CBAM is set to hit many developing countries the hardest (Ülgen,  2023). There are several reasons for this. Firstly, in the process of globalisation, many emission intensive production activities have been outsourced to the Global South whereas lower-carbon  activities have remained in the Global North (UNCTAD, 2021a). Consequently, the CBAM, whose price  is calculated according to a product’s carbon content, disadvantages goods coming from countries with  more carbon-based economies (ibid.). Secondly, the CBAM will impose a high financial and  administrative burden on countries that many developing countries are ill-equipped to handle.  However, failure to report carbon content will lead to a default carbon price being imposed by the  European Commission, so not investing in administrative capacities to report carbon content is not a viable option (Ülgen, 2023). In doing so, the financial burden of the CBAM would, conversely,take away  from resources that could be dedicated to adapting to the climate crisis. This loss would not just be  caused by administrative costs dedicated to calculating exports’ carbon content and to paying the  CBAM fee itself, but also by a loss of exports. The African Climate Foundation predicts that, at current  carbon prices, the CBAM may reduce Africa’s exports to the EU by up to 5.7% which may reduce GDP  by 0.9% or $16 billion (Ülgen, 2023). In essence, the CBAM will therefore block the route of export-led

growth that other developing countries have taken and may therefore slow down development  (UNCTAD, 2021b; Pietras, 2022). The BRICS can be said to embody, and indeed be united by (despite  their many differences), a frustration with the West’s approach to global climate policy that many  countries in the Global South, including in Africa, share (Torreblanca et al., 2023).

The EU’s counter to this criticism is that, despite worries about legal feasibility and climate justice, the CBAM’s initial results speak for themselves: the Brussels effect is already at work, with notably China, India, Turkey and the UK having introduced or planning to introduce carbon pricing systems and the  US and Canada debating its introduction (Wu, 2023; Suneja, 2023; Pauw et al., 2022; Pfeifer et al.,  2023). The CBAM is undeniably a powerful solution to the collective action problem inherent in  greening international trade, namely, how countries with more stringent climate policies and therefore  more expensive products can avoid being undercut by “dirtier” competition (Pauw et al., 2022). The  Commission also argues that the CBAM will create useful data on emissions to inform other climate  policies (ibid.). At a recent event hosted by Bruegel, Maria Elena Scoppio, Director for Indirect Taxation  and Tax Administration at DG TAXUD, furthermore pointed out that the CBAM is first and foremost a  measure against carbon leakage and that, as such, it is not possible to distinguish between the origins  of products as the policy is goods-based (Bruegel, 2023).

Regardless of whether the CBAM is successfully challenged at the WTO, the perception by many  countries of the Global South of the CBAM as a policy that will harm their development and the  frustration at the EU’s ‘economic imperialism’ (Ravikumar, 2020) is likely to remain. By definition,  developing countries’ emissions have not yet peaked. Incorporating them in any policy to reach global  carbon neutrality is therefore crucial. Alienating these countries – which are increasingly flocking to  the BRICS as an alternative to a Western-led world order – may furthermore have economic  consequences, for example, if the EU is excluded from future trade opportunities. Pushing ahead with  the CBAM without putting in place mitigating strategies for countries least able to manage the additional costs that it will impose risks losing allies in the global fight against climate change. Diplomatic tensions spurred by protectionist measures risk leading to an uncoordinated approach to  climate change, or, worse, to climate policy being perceived as a mere excuse for a “trade stick” with  which to beat developing economies. The first‘geopolitical’ Commission (European Commission, 2019) needs to take these facts into account if it wishes to maintain its leadership position in global climate  governance.

The CBAM is primarily a trade measure and is neither designed nor suited to differentiate between  countries of origin according to principles of climate justice. Hence a parallel tool should be created to  mitigate against the CBAM’s effect on least developed countries, rather than the approximately €9  billion annual revenue being spent domestically as is currently planned (Pauw et al., 2022). For  example, Leonard et al. (2021) suggest a European Climate and Sustainable Development Bank which  could work in tandem with the existing NDICI instrument to, for instance, aid with capacity-building.  The transition period until 2026 should be used to anticipate the extent of support needed.  The sooner developing countries can transition away from fossil fuels, the better. Even from a purely  strategic perspective, it is therefore not in the EU’s interest to slow down their green transition by  charging CBAM fees or to alienate them on the international stage, given how much work remains to  be done to adapt to the climate crisis.

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